What does the purveyor of a 4000 year old grooming service have in common with Internet startup sensations Uber and Airbnb? Well, all three are case studies in regulatory capture and the use (and abuse) of bureaucracy to stifle more efficient competition.

The NY Times Magazine had an interesting opinion piece by Jacob Goldstein (a reporter for the great NPR program, Planet Money) that highlights the perverse outcomes created by state licensing laws. It tells the story of Jestina Clayton, who grew up in a rural African village but moved to the small town of Centerville, Utah. With the help of Internet advertising, she set up a niche business braiding hair for a small group of Utah parents who had adopted African children but didn’t know how to braid their hair. This sounds like true success story of a small entrepreneur providing a previously unavailable service – until absurd licensing regulations got in the way:

After graduating from college, she considered getting an office job but decided instead to start her own hair-braiding operation and began advertising on a local web site. “It’s not like it was bringing me millions,” she says, “but it was covering groceries.” At least until a stranger who saw the ad e-mailed her a demand to delete it. “It is illegal in the state of Utah to do any form of extensions without a valid cosmetology license,” the e-mail read. “Please delete your ad, or you will be reported.”

A cosmetology license required nearly two years of school and $16,000 in tuition. But Clayton hoped for an exemption. After all, many Utah cosmetology schools taught little or nothing about African-style hair-braiding, and other states allowed people to practice it after passing a hygiene test and paying a small fee. Clayton made her case (via PowerPoint) to the exhaustively named governing body of Utah hair-braiding, the Barber, Cosmetology/Barber, Esthetics, Electrology and Nail Technology Licensing Board. The board, made up largely of licensed barbers and cosmetologists, shot her down.

Regulatory regimes, even ones that produce absurd results, quickly become intractable because they produce beneficiaries that will fight to keep their status. In Clayton’s case, she was blocked by local trade associations representing beauticians.

After being shot down by the board, Clayton allied with a Utah state representative who had adopted several children from Africa. The representative proposed a bill that would exempt hair-braiding from the cosmetology licensing law, but she was no match for the cosmetologists, who have started grass-roots campaigns in several states to fight the loosening of license rules. They turned out in full force in Utah. “We encourage regulation,” says Brad Masterson, a spokesman for the Professional Beauty Association. “Why should everyone else who’s doing hair have to conform to requirements and not her?”

How does Clayton’s story connect to our other examples? In the case of technology (and hair braiding), opposition often arises in the form of unions and professional associations that represent industries that are threatened by disruption (or, in Clayton’s case, just plain old competition). Two other examples can be found in apartment rentals and car service: Airbnb and Uber. Airbnb provides its users a simple platform to enable them to rent their house or apartment. Uber provides an online app that enables car service and limousine companies to easily coordinate and pick up customers in need of rides. Both felt the wrath of the incumbent industries in the form of legal challenges (from hotels and cabs respectively). Incumbents used their political capital to attempt to bring Uber and Airbnb under the same regulatory framework as the industries they were potentially disrupting–even though the two startups were competing in a different way, and did not necessarily justify the same regulation.

The “it’s not fair” argument is a lousy way to make public policy, especially when it is competitors–not consumers–who are the ones complaining. (Traditionally, the Federal Trade Commission is our “it’s not fair” regulator, and they tend to be less interested when the complaint issues from competitors instead of consumers.) When someone comes up with a new way to serve the needs of consumers, policymakers and regulators should resist the push to saddle the new company or service with legacy regulation–particularly when the main justification is “because the old guys have to.”

Like Clayton and her hair braiding business, Uber and Airbnb arose to fulfill a market inefficiency–and they used the connectivity of the Internet to remedy it. Like many Internet startups, Uber and Airbnb profit by reducing transaction costs and taking a cut of the savings–so everyone wins (except for the inefficient competitors).

In Airbnb’s case, its founders realized that there was a glut of unused apartments or houses at any given time in any given city. Now, owners can use Airbnb to make a few bucks from renting out their own apartment when they travel, and vacationers can get much nicer places at lower rates than provided by a hotel. Furthermore, it is not even clear that the hotel industry will lose all that much to Airbnb. Negative reactions in this case appear to be a knee-jerk reaction to a perceived competitive threat.

In the case of Uber, its founder realized that there was both a shortage of taxis in many cities (not surprising–once you own a taxi there is an incentive for you to not want to let anyone else into the market) and a highly disorganized market for car services that provide a similar, but more upscale, service.

Just because Airbnb and Uber compete with hotels and cabs does not mean they should be regulated like their competitors. Airbnb, at the end of the day, is just helping two parties conduct a transaction they already have the right to do. It is no different than someone using an apartment bulletin board or Craigslist to sublet their apartment for a short amount of time–its just a much easier way for buyers and sellers to connect.

The same goes for Uber and cabs. Unlike cabs that you can flag down on the street, Uber provides a service to its users who understand what they are getting. Just because you can press a button on your phone, instead of calling individual car service companies, does not fundamentally change the car service business–it just makes it more efficient and user friendly.

As Uber summed up in its public statement responding to a cease-and-desist letter, legacy regulations are not written with innovation in mind:

UberCab is a first to market, cutting edge transportation technology and it must be recognized that the regulations from both city and state regulatory bodies have not been written with these innovations in mind. As such, we are happy to help educate the regulatory bodies on this new generation of technology and work closely with both agencies to ensure compliance and keep our service available for our truly Uber users and their drivers.

As more Internet companies follow similar approaches to Uber and Airbnb and seek to make current markets more efficient, policymakers should resist the urge to penalize these new entrants by saddling them with new costs or unnecessary regulations. Shaking up traditional industries is a good thing, as it means that incumbents have to provide better service or lower prices (or both!) to compete.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

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The Disruptive Competition Project (DisCo) is a project to promote disruptive innovation and competition to policymakers. DisCo brings together experts to explain how disruptive change in the modern economy promotes growth and advances our society.

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